Why an exit strategy is a vital part of your business plan

Whether you’re just starting up or thinking about selling, having a solid exit strategy is a wise move for any business.

At the start of any business, the focus is on building success and the last thing any fledgling entrepreneur wants to contemplate is their demise.

Although it may seem odd to pre-empt the end and plan your departure as soon as you start up, the ideal addendum to any good business plan should be a solid exit strategy.

CEO of IglooBooks, John Styring advises business owners in an article for smallbusiness.co.uk, claiming that to get the most from your business you should consider your exit several years before you intend to sell:

‘It never hurts to be prepared and ensuring you have your accounts in order will also help you run the business day-to-day’.

There will be a point in the life of every business owner when they will have to walk away, and the reasons for moving on are many and varied: decreasing profits, lifestyle changes, illness, retirement, or just choosing to cash in on your goodwill and success - to name a few.

Picking the exit strategy that best suits your business is important and there are plenty to choose from, depending on your situation. They can include:

• Selling the business as an ongoing concern

• Succession - passing the business on to family members, friends or other stakeholders

• Merging with another business

• Liquidating the business

The most successful exits take a considerable amount of planning and the sooner you start, the more rewarding the process is likely to be.

If your envisioned exit strategy is selling the business for a profit, there are many ways in which you can prepare for this ideal eventuality.

Planning the ideal exit

Many business owners underestimate the difficulties associated with selling a business as it can be a time consuming and laborious process involving different financial and legal obligations. We take a look at some of the factors that you should consider when selling your business.

1. Preparation

Firstly you need to assess your options. The best time to sell your business is when you’re doing well and when profits are high. This is the main attraction for potential buyers and allows you to place your business at a higher value.

From the initial letter of intent through to the closing of the deal, your exit plan should be very clear to avoid confusion. In order to do this make sure to:

• Structure the deal (terms should include payment details and tax implications)

• Decide whether you want professional help

• Define the strongest points of your business and study it from a buyer’s perspective

• Ensure the records are complete, up to date and in good order

• Consider what assistance (if any) you will give after the sale is finalised

• Think about financing – will you leave any financing in the business?

Styring’s advice is to ‘Look at your company for flaws you would criticise in your competitors. Your accounts, brand and business plan – nothing should escape observation. This will allow you to ensure the first impression a potential buyer has of your business is a good one.’

2. Valuation

As a business owner, your main interests will be significantly different from the buyer; as you will want to maximise your gain and they will want to minimise their spending.

There is no dedicated method to use when selling your business and the process of valuing your business can differ greatly depending on the current market value of similar businesses in the sector.

Look at where you stand - the Australian bureau of statistics ABS is a good place to start, as it provides insight into industry figures and statistics.

Here’s what you’ll need for the valuation process:

• Information about physical assets such as buildings, machinery, stock and equipment

• Other intangible assets such as intellectual property, copyrights,patents and goodwill

A marketing plan is about as far as you go when planning your exit without actually having a buyer in mind, but preparing yourself to this stage is highly beneficial. Here’s a look at what you’ll have to do when the time eventually comes:

4. Negotiation

When negotiating the sale with your chosen buyer you'll need to make sure everything is accurate. The buyer is entitled to conduct due diligence checks (a detailed investigation of every area of your business) and if the information provided is untrue it could be deemed misleading or deceptive conduct.

Naturally the seller wants to generate as much profit as they can, reflecting the time and effort invested in the business, however, the buyer will want to pay the least - their main focus being on the future. Both parties will have to arrive at a fair price through negotiations.

Things you’ll need to agree with the buyer:

• Sale price

• Deposit

• Settlement period

• Training / employees on handover

In the same way that the buyer is allowed to conduct due dilligence checks, you are not obliged to complete a deal without knowing about the buyer’s background and their ability to meet the set commitments.

You can safeguard your sale by looking into the buyer’s background and financial position – any history of bankruptcy, business collapses, or a criminal record would be good to know about!

If the seller is financing a part of the price, then it is especially important that the buyer has a good reputation and standing.

To obtain the confidence of the seller the buyer must put down a good deposit as a commitment to buy (generally speaking up to 10 per cent of the purchase price is standard).

5. Contract & final negotiations

Both parties will be required to sign a provisional contract. This will include the assumption of approval by the suppliers and a provisional satisfactory lease, resulting in the buyer assuming responsibility for the business from a certain date.

• Pay off the outstanding instalment notices and activity statements, and any outstanding bills

The time is now

Early planning could help you maximise the value of your business and change the way you operate your business, giving you a set direction, as Jennifer Lawson, owner of Just Books Inc. stated in a recent article:

“I began to see my exit strategy less as a termination, and more as a logical part of the high goals I had set for both my company and myself”.

The best time to start planning your exit strategy is now and familiarising yourself with the selling process isn't a bad idea either. As the saying goes: 'You can never be too prepared'.

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